Hi,
The option is only valid for files that don't need the Windows shell to provide a launch application: .exe and .bat files. This means if you need to run an .msi you install, you will need to also install a "launcher" .bat file that takes the path to the .msi files as a command line input and calls msiexec.exe on the files. You may find the %dest command line variable helpful for specifying the installed location of the .msi files (see the Edit Installer Dialog Box - Files Tab help for more info).
As far as the .bat file issues, it is likely related to assumptions your batch file is making about the working directory (which is the directory setup.exe resides in), or other aspects of the target system.
I hope this helps.
Mert A.
National Instruments